Credit-dependent industries demand rate cuts

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By Leith van Onselen

With new home sales hammered:

Annual housing credit growth running at all-time lows:

And retail sales flatlining in real terms since the onset of the Global Financial Crisis:

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Australia’s credit-dependent industries have stepped-up pressure on the Reserve Bank of Australia (RBA) to deliver interest rate cuts.

First, it was Premier Investments Chairman (and ex-RBA board member) Solomon Lew, who last week called for drastically lower rates (50 to 75 basis points) to support the retail sector:

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Mr Lew… called on the RBA to immediately cut interest rates by 50 to 75 basis points to stimulate consumer demand and prevent further job losses.

“I really believe the Reserve Bank has mishandled the mining boom to the great detriment of the non- mining sector and particularly retail which is one of the key drivers of economic activity. With great respect, the Reserve Bank needs to both drop interest rates immediately – I’m not talking just 25 basis points – to stimulate confidence at a time when all Australia should be booming,” he said.

“I’d be calling on the Reserve Bank to cut 50 to 75 basis points at the next meeting. The Australian economy is in trouble…

“A bit of inflation can’t hurt and at this point in time market confidence needs to be rebuilt … the eastern seaboard as far as I’m concerned is completely frozen and the only jobs being created are in the west and that’s in the mining sector.”

Mr Lew’s demand was echoed by Stockland CEO, Mathew Quinn’s, request earlier this week that the RBA lower interest rates to support the housing market as “affordability” deteriorates:

…the (housing) recovery is likely to be slow unless we see a reduction in bank interest rates to improve affordability and buyer confidence.

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Now the mortgage industry has joined the fold, with Aussie Home Loans founder, John Symond, yesterday warning that borrowers will ‘burst like tomatoes’ unless the RBA cuts rates:

“People are like tomatoes that have been squeezed too much. At some stage they’ll burst. They’ve had a gutful,” Symond said on Ross Greenwood’s Money News show on 2GB.

Speaking also to David Koch on Sunrise, Symond joined the likes of Yellow Brick Road’s Mark Bouris by heaping more pressure on the Reserve Bank to cut interest rates and inject some confidence into the housing market and economy in general.

“The government and they RBA are a bit out of touch by not accepting that parts of the economy, especially small businesses, is doing it really tough at the moment,” Symond said.

“As well as the Australian economy has performed relative to other economies, we could easily get into the situation where the economy could stall,” warned Symond.

“We need an injection of good news and an injection of confidence – the best way to do that is to start dropping interest rates.”

Symond said the basic principles of supply and demand suggested the housing market was unlikely to recover anytime soon, pointing out that there were currently more than 300,000 houses listed for sale on the market, the highest in Australia’s history.

“We have an oversupply of sellers versus buyers, which suggests the housing market will remain soft,” he said.

Furthermore, he also expressed concern at the increase in self-employed borrowers facing mortgage difficulties as noted in the increase in low-doc loan arrears (loans principally used by those self-employed) in the recent Fitch Dinkum Index for the December 2011 quarter…

“Mortgage arrears are a worry because they are trending in the wrong direction,” said Symond.

“Houses are taking twice as long to sell, and if you’re in trouble it’s going to take you twice as long to sell your property – if you can in fact sell it.”

With the RBA scheduled to meet this Tuesday to decide on interest rates, we’ll know soon enough.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.